September 17, 2020
A large number of U.S. hotels temporarily closed their doors as bookings dried up last spring due to the coronavirus pandemic. And as fall approaches, it looks like a significant number of them might not be able to reopen as expected even if business starts to pick up to a healthy level again.
Although big banks and other lenders often allowed some flexibility for strapped hotels to make their mortgage payments during the pandemic, their patience is running low and foreclosure is looming for some major urban properties.
New York City, which has seen a boom in new hotel openings in the past few years, is now seeing a boom in permanent closings. Take, for instance, the Omni Berkshire Place, a classic business travelers’ hotel at Madison Ave. and 52nd Street. Go to its website and you’ll see a notice that the property is “permanently closed.” The website notes that over the years, the hotel has served “millions of guests,” but it adds: “COVID-19 has swiftly and significantly impacted the hospitality industry, and like many hotels, especially those in New York City, we have felt the brunt of the global health crisis. We have made the extremely difficult decision to permanently close Omni Berkshire Place.”
Earlier this month, the 44-story, 478-room Hilton Times Square in the heart of Midtown also closed down for good. The Embassy Suites-Midtown West was taken over by lenders after the real estate investment trust that owned it failed to make the expected debt payments. The W New York-Downtown in the financial district reportedly plans to shut down for good in October. And more permanent closings are likely.
According to a report on CNBC, 34 percent of the hotels in New York City are delinquent on their debts. The report quotes an executive at a leading hospitality investment bank as saying the closures thus far are merely “the tip of the iceberg,” with more likely to follow – especially in the Times Square/Midtown area. The city was already becoming overbuilt before the pandemic hit, and because the city was the earliest big hotspot for COVID-19, tourists and business travelers alike stayed away in droves.
And it’s not just New York. The CNBC report notes that hotel delinquencies “are rising significantly” in cities like Houston, Los Angeles and Chicago.
Speaking of Chicago, one of that city’s most iconic hotels – the 1,600-room Palmer House, operated by Hilton in the heart of The Loop – was sued last month by lenders for defaulting on a mortgage to the tune of more than $330 million. The hotel, Chicago’s second-largest, has been closed since last spring, and its reopening is now uncertain. The lenders asked the court to appoint a receiver for the property.
In Los Angeles, the buzzy Chateau Marmont hotel will convert to a "members only" property. A hotel spokesperson told the LA Times: "The pandemic showed that safety was of the utmost importance to guests, and limiting the hotel to select members ensures that management knows all guests before they arrive." Four Red Rock hotels in the Las Vegas area might not reopen, according to a report in Travel Weekly.
In San Francisco, the Virgin Hotel that opened in May 2019 across from the Moscone Convention Center remains closed after shutting its doors in March of this year, and all mention of the property has been scrubbed from Virgin Hotels’ website. But that may be the result of an ongoing dispute in which Virgin Hotels has sued the hotel’s owner for terminating what was supposed to be a 20-year management contract. The lawsuit alleged that the owner “is attempting to seize upon the disruption created within the hotel industry by the current COVID-19 pandemic as an opportunity to prematurely and wrongfully terminate the (management agreement) upon manufactured and false grounds.” Virgin has not responded to our requests for more information or updates on the fate of the property.
When the dust settles after all the bankruptcies and repossession proceedings, many of the affected properties are likely to reopen again as hotels – assuming lodging demand eventually recovers -- although some may be converted to other purposes like residential.
It's not all doom and gloom, though. For example, Marriott's shiny new Edition Times Square, which opened with much fanfare last year announced in May that it would close permanently. However, it seems that the hotel has found some financing, and a call to its reservations department confirms that it will open again on October 15.
In San Francisco, there were about 35,000 hotel rooms available prior to COVID-19. Currently, about 20,000 of these are available, but are being used primarily for housing essential and COVID-related workers. That leaves about 15,000 hotel rooms still off the market, and most of those are in big downtown convention hotels which still have boards covering entrances. "When hotels reopen this fall, we don't anticipate a huge spike in demand-- it will be primarily leisure and weekend travelers. Due to COVID-19 we are unable to host conventions or large sports gatherings, which are an essential part of the mix during fall season," said Joe D'Alessandro, CEO of the city's convention and tourism bureau.
Last month, the American Hotel & Lodging Association (AHLA) and hundreds of industry executives sent a letter to Congress asking for urgent relief in the face of unprecedented financial difficulties.
“With record low travel demand, thousands of hotels can’t afford to pay their commercial mortgages and are facing foreclosure with the harsh reality of having to close their doors permanently,” said AHLA CEO Chip Rogers. “Tens of thousands of hotel employees will lose their jobs and small business industries that depend on these hotels to drive local tourism and economic activity will likely face a similar fate.”
The group cited a report from Trepp, a firm that tracks the mortgage-backed securities market, showing that as of July, 23.4 percent of U.S. hotels were 30 or more days behind on their debt payments – the highest level ever, up from just 1.3 percent at the end of last year. The report notes that the metropolitan region with the greatest percentage of delinquencies is Houston, at 66.2 percent, followed by Chicago (53.8 percent), New York (38.7 percent), Seattle (36.1 percent) and Austin (35.7 percent).
While lenders wait for their debt payments, the hotel industry is still struggling with a lack of consumer demand. Like the airlines, hotels have seen a rebound in business since last spring, but in recent weeks it appears to be stalling out. According to the hotel industry data tracking firm STR, U.S. hotel occupancy reached its low point of 22 percent in late March. In mid-August the rate was back up to 50.1 percent, but since then it has had trouble reaching the 50-percent mark. For the week ended Sept. 5, occupancy was 49.4 percent, down almost 19 percent from a year ago.
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